Results

• Below Expectations: Brahim’s reported 9MFY15 net loss of RM13.5m came is below expectations or vs. our profit projection of RM9.9m.

Deviations

• None.

Highlights

• Yoy: 3Q revenue declined by 27.66% yoy due to lower contributions from its inflight catering segment. The average selling price/meal served to MAS was lower, in line with the latter’s efforts to reduce unit cost of food services.

• Adding to the lower meal pricing, passenger traffic at KLIA was also lower yoy. This can be attributed to two discerning factors: 1) the haze has not only smothered our skies but also passenger traffic; and 2) The ringgit decline have led to a decline in outbound tourists.

• Operating loss is mainly attributed to the concessions given to MAS under its Recovery Plan which has effectively ended on the 15th of September 2015 when the New Catering Agreement (NCA) took effect.

• YTD: Topline dropped by 20.7% yoy, contributed by a mixture of lackluster performance among its business segments: catering (-21.2%), logistics (-34.0%), and restaurant (-22.2%). Profit fell into losses despite lower operating costs, due to losses in the catering segment and holding company as well as its high interest expense.

• Inflight Catering: Qoq revenue contributions from the inflight catering segments declined by 28.4%, a reflection of MAS’s ongoing restructuring. The segmental loss of RM6.52m was due to price suppression implemented by MAS as part of its recovery plan.

• Non-aviation catering: the operations of the Emirates lounge in KLIA, café outlets at private universities as well as providing meals on board the KTM service is the beginning of its diversifying away from aviation catering. This segment is expected to grow in the long term.

Risks

• Key risks in the near term include the weak RM curtailing outbound tourists and MAS’s ongoing restructuring plan. In the medium to long term; risks include failure to effectively diversify away from aviation based catering.

Forecasts

• We amended our FY15 forecast to account the loss in earnings for this quarter. However, we are expecting that earnings should turn positive in 4Q15 due to it being their strongest quarter of the year, as well as the stabilized pricing under the NCA.

Rating

• We believe that the stock is fully valued at the current price and maintain our HOLD call. Whilst the emergence of SATS as a strategic partner has brightened prospects in the long term, near term earnings are still cloudy amidst MAS’s restructuring efforts. Furthermore, there is a lagged effect in cost savings and efficiency measures on earnings. Growth in the non-aviation catering segment will take time to fruit.

Valuation

• Maintain TP of RM1.00 pegged to 1.0x P/B

Source: Hong Leong Investment Bank Research - 25 Nov 2015